Dudley says threshold high for changing taper plans

President of the Federal Reserve Bank of New York William Dudley attends a forum organized by Mexico's Central Bank in Mexico City October 15, 2013.

Credit: Reuters/Tomas Bravo

NEW YORK (Reuters) - The U.S. economic outlook would have to change substantially for the Federal Reserve to alter the pace at which it is winding down asset purchases, a top U.S. central banker said on Thursday.

While growth is likely to quicken this year, the threshold for changing course on stimulus withdrawal is "pretty high," said New York Fed President William Dudley during an event hosted by The Wall Street Journal.

"The outlook would have to change in a material way relative to my expectation," he added.

The Fed this year started winding down five years' worth of unprecedented accommodative policies meant to fight the 2007-09 recession and foster a stronger recovery. That means the central bank will eventually stop buying trillions of dollars worth of bonds and holding overnight interest rates at zero.

Dudley acknowledged that recent fierce winter weather in parts of the country have depressed activity in early 2014, but said those effects will be both hard to gauge and transitory.

"The weather is going to make reading the data over the near term a little more difficult," he said.

"The first quarter will probably be less than 2 percent for annualized growth," Dudley said. In the spring, "we'll see some of these weather effects dissipate."

Still, he said the economy would likely be better this year than last, "on a 3 percent type of growth trajectory, which should be enough to generate payroll gains that lead to continued gradual improvement in the labor market."

But he was quick to add that headwinds are likely to persist for some time.

"We have a long time to go before we actually have to think about raising short-term rates in my opinion," he added.

According to Fed futures contracts, the first rate hike is not likely until the second half of 2015, with a 63 percent chance that it comes at the Fed's July 2015 meeting.

Dudley called current market expectations "appropriate" based on what is known about the economy today.

Last year, the Fed said it would not consider raising rates until the jobless rate fell to at least 6.5 percent, just a tenth of a percentage point from where it is now.

But policymakers have downplayed that threshold in recent months. Economists fear the falling unemployment rate partly reflects large numbers of workers leaving the labor force.

On Thursday, Dudley said that the 6.5 percent threshold "isn't providing a lot of value right now in terms of our communications," adding that the Fed is looking at a broad array of economic indicators to gauge the health of the economy.

A recent paper by New York Fed economists, including one of Dudley's top advisors, however, said retirement of the baby boom generation may be a more important explanation for the so-called slack in the labor market. If so, it could mean the economy may be closer to full recovery than the Fed has thought.

Dudley said there was "quite a bit of uncertainty" about the issue but added that the economy was still far from full employment. He reiterated the Fed's view that current low inflation will gradually drift back toward the central bank's 2 percent comfort level.